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In recent months Carl Icahn has been agitating for a stronger rate of share buy-backs by Apple Inc. (Nasdaq: APPL), in which he currently holds a 4.7 million share position, or about one half of one percent.
His general argument is a familiar one, based on the financial engineering consequences of a company buying back its own shares when they are perceived to be relatively cheap, thus enhancing earnings per share and encouraging a stronger eventual multiple as improved business results subsequently flow through.
His specific application of the argument to Apple however would be unique because of the massive scale he proposes for such a project – US$150 billion of buy-backs to be financed by a big chunk of the company’s existing cash plus further large-scale borrowings. Apple itself already has in place a US$60 billion official share-buy back programme of its own, which it is part of the way through implementing. It put this programme in place earlier in the year, partly in response to another activist investor at the time, David Einhorn of Greenlight Capital. At the time this programme actually made a good deal of sense as Apple then was able to also float a US$17 billion bond issue at absolutely the lowest rates on the market, with impeccable timing.
However Icahn’s proposal is much more problematic as it would fundamentally alter the Apple balance sheet, and may in any case be completely unnecessary. After momentum investing drove the share up to US$700 in 2012 on completely unrealistic expectations for its rate of business progress, the same momentum players then took it back down to US$400 six months later and many people lost money.
This clearly left a bad taste, and helped create a deep ocean of negative sentiment on Wall Street that has permeated around Apple since then, until the last few months when the shares have already strongly started coming back. Today Apple shares stand at about US$517 and the negative sentiments have just about dissipated completely. Given that this is so, Apple’s existing relatively minor (compared to Icahn’s plan) programme of buy-backs plus the likely stronger performance of the business itself over the coming months – always in the end the major driver of a company’s shares – will all on its own likely bring support to the shares.
Carl Icahn, who has an excellent understanding of the power of public relations, of course knows this. Both his new Twitter account and his new web site called Shareholder Square Table designed for this kind of subject all bring attention to the obvious: namely that Apple shares are likely undervalued. The attention he is getting and the controversy it brings in itself likely helps push the shares up a ways, and will likely increasingly continue to do so provided the business then itself performs.
With a strong round of Apple product introductions just launched in time for the Christmas holidays the stage should therefore be set for a bumper quarter for the company. The iPhones 5s, the iPhone 5c, the new iPad 5, the new retina iPad Mini and new notebook and desktop computers all look like strong contenders and have all been well received.
One can imagine that Apple will therefore likely simply ignore Carl Icahn’s proposals, and be content to let the results speak for themselves moving forward. It would then be surprising if Carl Icahn were to actually go ahead with a proxy challenge against them, which he has so far only hinted at. Schoolyard bullies generally go all the way only with weak targets and he is no different.
Already some of Carl Icahn’s senior billionaire buddies, financial industry colleagues and tech-industry CEO’s have called him out on his plan.
Warren Buffet last week said “I think the Apple management and directors have done a pretty darn good job of running the company, ” … “So my vote would be with them.”
And he continued with another jab at Icahn, in an interview with CNBC saying “Icahn’s Apple strategy may not be the best one for the majority of the company’s shareholders. “I do not think that companies should be run primarily to please Wall Street and largely shareholders who are going to sell, ”…“I believe in running Berkshire for the shareholders who are going to stay and not for the ones who are going to leave.”
Last week also, bond king Bill Gross, co-chief investment officer of giant investment firm PIMCO, with nearly US$2 trillion under management, also weighed into the dispute. He said in his own Twitter comment “Icahn should leave Apple alone & spend more time like Bill Gates. If Icahn’s so smart, use it to help people not yourself.”
Former Apple CEO and respected tech industry figure John Scully also helped Apple out during an interview also televised on CNBC, saying:
“Carl Icahn is one smart guy. But the reality is Apple is about building great products, great experiences, and if I were Tim Cook, I’d deal with him the way Steve Jobs would probably with him – not blink. I would continue to invest in the business and grow the platforms they have. There’s still a lot of growth ahead for Apple without having to use the – what I’d call the old recourse that many companies follow when they don’t have big ideas like Apple and just go in and buy their stock back or make bigger dividends.”
In response Carl Icahn also took to the airways saying on CNBC with uncharacteristic humility: “I have respect for both those guys, ” he said referring to Gross and Scully. “I think Bill Gross certainly has a right to his opinion, as does Sculley. But it doesn’t mean they are right.”
Then Icahn immediately undid all the good work by comparing himself to Teddy Roosevelt, which is a major stretch:
“A lot of critics just keep saying why doesn’t Icahn just leave our companies alone, ” Icahn said on CNN, … “To me that’s like saying: Why didn’t Teddy Roosevelt leave the monopolies alone when they were strangling our economy.”
Well Mr. Icahn you are not Teddy Roosevelt and Apple today is doing much better than the economy was then, that’s for sure. However Carl Icahn actually understands this very well and is likely just loving the publicity. Probably Apple doesn’t mind too much either, and it will likely only benefit from the attention. Tim Cook’s principal strategy moving forward though is now simply to execute and deliver on the strategies he has put in place. If he does then just as with Netflix this year both Apple and Carl Icahn will be laughing all the way to the bank.
